Many industry associations and non-profit organizations have submitted comments both in support of and against the Consumer Financial Protection Bureau’s Notice of Proposed Rulemaking that seeks to regulate the use of mandatory arbitration clauses in contracts for consumer financial products and services. The proposed rule would create a new 12 CFR Part 1040 to govern mandatory arbitration clauses (see Banking and Finance Law Daily, May 5, 2016).

According to the CFPB, mandatory arbitration clauses typically provide that either the company or the consumer can require that disputes between them be resolved by privately appointed arbitrators except for cases brought in small claims court. Either party generally can block lawsuits from proceeding in court. These clauses also generally bar consumers from bringing group claims through the arbitration process. No matter how many consumers are injured by the same conduct, consumers must proceed to resolve their claims individually against the company.

Arbitration works. A coalition of industry associations, including the American Bankers Association and the Independent Community Banks of America, has asked the Bureau withdraw its proposal because it “would have the practical effect of eliminating the availability of low-cost, efficient, and fair arbitration programs for consumers.” In the alternative, the letter asks for the Bureau to adopt “a more tailored approach” that preserves “consumers’ access to arbitration.” According to the comment letter, arbitration has “served consumers and other stakeholders well for decades by providing an alternative to crowded courtrooms, complex litigation rules, and the broken class action system.”

No authority. The American Bankers Association’s comment letter was limited to the potential application of the rule to policy loans issued by insurance companies. The letter asserts the following claims.

The CFPB does not have the authority to regulate the “business of insurance;” instead, it is expressly excluded by the Dodd-Frank Act.

Policy loans are part of the business of insurance.

Policy loans should not be treated as an extension of credit under the rule.

The McCarran-Ferguson Act bars the application of the rule to policy loans.

Negative impact. The Competitive Enterprise Institute submitted comment regarding the CFPB’s proposed ban on mandatory arbitration clauses. According to CEI’s John Berlau and Iain Murray, who prepared the comment letter, the proposed rule would have a negative impact on Americans in terms of cost-effective conflict resolution and access to the sharing economy, as well as the needless financial windfall paid by consumers to wealthy attorneys. “The CFPB arbitration rule would take away the rights of consumers and financial professionals to resolve disputes by binding arbitration instead of the often-cumbersome and ineffective process of class action lawsuits,” said Murray. Berlau added that the rule would have “a devastating effect on the new sharing economy – financial innovations like peer-to-peer lending.” Additionally, CEI suggested making the terms of arbitration clauses opt-out.

Little benefit. A comment submitted by U.S. Chamber of Commerce Center for Capital Markets Competitiveness stated that, in promulgating the proposed rule, the CFPB did not address “whether the elimination of the only method for vindicating the claims consumers care about is justified by the interest in promoting class actions that rarely provide any benefit to consumers but do provide large recoveries for lawyers.” The letter stated that arbitration clauses “provide significant advantages to consumers” “as a practical matter, the proposed rule would drastically limit, if not eliminate, the use of arbitration in consumer financial contracts while conferring little to no benefit on consumers in return.”

The letter stated that the bureau ignored data from its own study that showed the benefits of arbitration and the drawbacks of class action lawsuits. The Center also stated that the proposal would benefit lawyers who file class action lawsuits instead of consumers. The bureau’s proposed rule would effectively eliminate arbitration without pursuing any possible alternatives, according to the letter.

Preserve class actions. Another comment letter, submitted by a coalition of hundred of civil rights, labor, community, and non-profit organizations, expressed strong support for the proposed rule, calling the proposal “a significant step forward in the ongoing fight to curb predatory practices in consumer financial products and services and to make these markets fairer and safer.”

The letter states that class actions provide a practical way for groups of consumers to join together to attempt to hold financial institutions accountable for corporate wrongdoing. Additionally, the comment letter praises the study conducted by the CFPB which verified the prevalence of forced arbitration clauses. These organizations urge the CFPB to ban forced arbitration completely, but that the “proposed reporting requirements will lend crucial transparency and accountability to a previously opaque system.”

Room for improvement. In response to the CFPB’s proposal, Better Markets stated in its comment letter that it strongly supports preserving the right of consumers to participate in class actions. In the comment letter, Better Markets stated that it will “enhance their ability to obtain meaningful relief” and will “serve as a powerful deterrent against misconduct by financial companies.” Additionally, according to the comment, the proposed rule will lay the foundation for possible future rulemaking and enforcement activity to address any continuing abuses in the arbitration process.

Better Market’s letter highlighted several areas where it states the proposed rule could be strengthened, including the following.

CFPB should exercise the full extent of its authority under Section 1028 of the Dodd-Frank Act and broadly prohibit the use of all pre-dispute arbitration clauses that effectively mandate, or force, binding arbitration upon consumers.

CFPB should strengthen the Proposed Rule by eliminating or limiting the grandfather clause.

CFPB should expand the reporting requirements so that covered firms must submit their arbitration agreements and all related documents to the CFPB not just documents pertaining to specific arbitration proceedings that are actually instituted, often long after arbitration clauses have been in effect.

CFPB should maximize transparency by publicly sharing as much information as possible regarding filed arbitration cases, consistent with any legitimate confidentiality concerns.

CFPB should coordinate with other agencies that share regulatory and enforcement jurisdiction over aspects of the Proposed Rule, including state attorneys general, and it should also engage in a strong public education campaign so that consumers better understand the rights and remedies they have for resolving disputes with financial firms.

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